Shares of Transat A.T. surged Monday to the highest level in nearly three years after the travel company signalled it's having a significantly more profitable summer season than expected.
The Montreal-based tour operator's shares (TSX:TRZ) peaked at $8.87 in intraday trading, up 11 per cent from Friday's close, and its highest level since December 2014. The stock gave up some ground to close up 88 cents to $8.84.
Transat said its third-quarter results will show "significantly higher" adjusted earnings than during the comparable period last year.
Spokesman Christophe Hennebelle said the results anticipated two months ago, when it issued its previous outlook and second-quarter results, did not prove to be accurate.
At the time, Transat estimated overall results for the summer season from May through October would be similar to last year. But revenues to July 31 have turned out superior to last year, especially since mid-June.
"The revenues are higher, the costs are slightly lower, and the effect is increased by the fuel and currency effects," Hennebelle said in an interview.
Since the company is in a blackout period before the release of its results Sept. 7, Hennebelle declined to provide details, including whether the improvement was due primarily to "sun" destinations or the transatlantic market, which is largest in the summer months.
Transat said this year's third-quarter adjusted net income will be similar to the $26.9 million posted two years ago, and significantly higher than the $2.5 million reported in last year's third quarter.
The 71 cents per share outlook would be substantially higher than the 10 cents per share anticipated by analysts.
Analyst Mona Nazir of Laurentian Bank Securities said the return to historical levels of profitability would be very positive for a company that has made a series of strategic changes over the last few years.
Nazir said Transat's ability to significantly increase its profitability speaks to its earnings capability.
"The combination of $450 million plus in cash, a potential return to positive EPS for the year, alongside strong tailwinds, may cause some investors to begin to pay attention to the Transat story once again," she wrote in a report.
Cameron Doerksen of National Bank Financial increased his target price for Transat shares by 41 per cent to $12 following the revised guidance.
While he's optimistic about the next two quarters, Doerksen says the longer-term strategic challenges for Transat remain.
"We see an intense competitive environment continuing for Transat," he said, pointing to industry capacity growth that could surpass what it faced in last year's harsh winter.
Doerksen also said Transat's efforts to build out its hotel business to reduce earnings cyclicality will likely take several years.
He said the revised outlook isn't surprising since Air Canada (TSX:AC) recently reported higher Atlantic prices and revenue per available seat mile.